Yahoo and Microsoft claim that their deal will be a game-changer for Web search and will drive innovation. But mobile seems to have gotten only a cursory nod from the alliance.

Per the agreement, Microsoft will now power Yahoo search, while Yahoo will become the exclusive worldwide relationship sales force for both companies' premium search advertisers. During a conference call, the CEO of each company stressed the benefits for both partners, as well as for advertisers, publishers and consumers, but the executives failed to give mobile search the attention it deserves.

"We don't know what we don't know about all of the scenarios in the mobile case," said Steve Ballmer, CEO of Microsoft, Redmond, WA. "This deal will allow us to offer an expanded and more competitive search advertising marketplace, creating a strong No. 2 player in search and search advertising.

"The search scale we will get for Bing through this deal will lead to greater innovation for advertisers and consumers," he said. "Advertisers and publishers get a competitive alternative [to Google] and more opportunity to see their investments go farther.

"Advertisers will get better returns on their investment and will help the industry as a whole to prosper."

Yahoo's executive did address the mobile channel during the call, although the details were somewhat vague.

"We have the option of using Microsoft technology for the mobile Web experience, and while it's not an exclusive agreement as it is on the PC, we certainly have the benefit of it and we look forward to exercising our right to leverage it," said Carol Bartz, CEO of Yahoo, Sunnyvale, CA.

"We're very interested in doubling down on the mobile experience to integrate search and our content such as finance, news and sports,"she said.

"The ad model for mobile search looks like the ad model for PC search. This deal with Microsoft frees us up to invest in other areas of the mobile experience.

"It allows Yahoo to focus on doing what Yahoo does well -- be the center of people's lives online, providing information and entertainment on both desktop and mobile."

Microsoft and Yahoo are hoping that this deal will accelerate the pace and breadth of innovation by combining both companies' complementary strengths and search platforms into a market competitor with the scale to fuel sustained development in search and search advertising.

Facing a competitor with near monopoly status, Microsoft and Yahoo realized that scale is a key element if they are to lure advertisers away from Google.

Both executives explicitly framed the deal as providing a viable alternative to Google for advertisers by combining Yahoo's and Microsoft's search marketplaces so that advertisers no longer have to rely on one company that dominates close to 80 percent of all search.

"What this deal is really about for everyone is scale -- by combining the scale and technology of both companies, we can provide a better experience for advertisers, publishers and users," Ms. Bartz said. "Advertisers want an alternative [to Google] that has scale, and this will create a significant competitive alternative in search.

"This will also allow us to create more competitive deals for search syndication," she said. "The agreement between Microsoft and Yahoo is a game changer.

"We will share investment expenses to scale the market, which lets us invest in elements critical to our future success, including display advertising and mobile technology."

Marketers' take
The Microsoft-Yahoo search deal presents an interesting alternative for marketers to achieve broader reach all with one business relationship, said Paran Johar, New York-based chief marketing officer of JumpTap.

"The key here will be for Microsoft and Yahoo to maintain or grow market share, because if it declines over time, there will be less incentive for advertisers to put dollars in that direction," Mr. Johar said.

"Mobile advertising is a whole other ball game, as evidenced by the terms of the deal itself," he said. "The PC part is exclusive, whereas mobile is not -- Yahoo can partner with other vendors in the future if it chooses.

"Mobile is rapidly evolving and there is a lot yet to be played out, especially with developments in the operator and handset landscape that could significantly impact the market. Traditionally, when a new market is created, new companies emerge that secede the older dominant players."

Another marketer believes that the potential effect of the Yahoo-Microsoft deal on the search ecosystem in general, and mobile search marketing and advertising in particular, is significant.

According to comScore, Yahoo-Microsoft will thusly have a market share of 28 percent out of the gate.

"In terms of the impact on mobile search marketing and advertising, it's harder to make predictions," said Steve Baldwin, editor in chief of Didit, New York. "Both Yahoo and Microsoft have fielded initiatives in the mobile market, and it remains to be seen whether they'll be integrated or remain separate entities.

"Microsoft is making big moves in the mobile area right now, especially in terms of its deal for Bing to provide default search services for Verizon, whose installed base of users is approximately 85 million," he said.

"I cannot speculate on how its new arrangement with Yahoo might strengthen its offerings on such phones, but now that Yahoo and Microsoft are on newly friendly terms additional synergies do present themselves."

Mr. Baldwin believes that having access to a much higher volume of search query data will help it realize some of the promises its targeting technologies have offered marketers for some time now.

"It's too early to speculate on how this deal will impact prices," Mr. Baldwin said. "I do think that by making combined media buys -- for example search plus display -- easier to execute, this deal may move some marketers who have been discouraged by the complexity of the process."

Will this deal be enough for Microsoft and Yahoo to challenge Google's dominance?

"Highly doubtful -- the odds that Yahoo product design plus Microsoft search results will be enough to sway the average mobile users away from Google are minuscule," said Rachel Pasqua, director of mobile strategy at iCrossing, New York. "As a rule, we see people using the same search tools on their mobile that the do on their desktop and that means Google still has the advantage.

"That said, the benefits for both are obvious -- Yahoo can stop worrying about search and concentrate their efforts on mobile product and content design, places where they've really excelled, and where Microsoft has always been lacking," she said.

"And Microsoft gets to add Yahoo's estimated 34.6 percent to their own mobile search market,share, but that still won't put them over 50 percent."

Analysts' take
One analyst believes that the Microsoft-Yahoo deal will lead to more search competition, which is a good thing.

"This deal should allow Yahoo to give up its drive to to beat Google and concentrate on the elements it does do better -- display media and social media -- devolving the competition and the significant investment involved off to Microsoft, whose Bing product showcases their determination to continue to fight," said Rebecca Jennings, principal analyst at Forrester Research, in a blog post.

In the U.S., Google has around a 65 percent share of the search market, while the new Microsoft-Yahoo combination will have around 30 percent, according to Forrester.

Google is even more dominant in Europe, with something around 80-90 percent depending on market.

"While this won't immediately worry Google, this will create a more viable second-string player in all markets, giving interactive marketers a significant, credible alternative and additional outlet for their search spend, or at least a better incentive to run trials outside of Google," Ms. Jennings said.

"Marketers should use multiple search engines, which can provide more flexible ways to reach audiences, and this deal should help convince even the most stubborn budget-holder that spreading their money outside of Google would be beneficial," she said.

Forrester's U.S. Interactive marketing forecast shows that search spend is forecast to continue to grow at around 15 percent a year, to more than $30 billion in 2014 in the U.S. alone, which explains why Microsoft is so keen to play in this market.

"With a 30 percent share of the U.S. market, this gives Microsoft enough muscle power to start disrupting the current status quo -- by being more competitive on price, for example," Ms. Jennings said. "For interactive marketers, another strong competitor can only be a good thing."

Another analyst was resoundingly unimpressed with the news.

"Could this deal be any more boring?" said Carl Howe, director of anywhere consumer research at Yankee Group, Boston, MA, in a blog post. "The amazing thing about this deal is how little impact it has.

"Specifically, search rankings won't change."

According to Yankee Group, Yahoo was previously the number-two search engine in the world.

"Now that it and Microsoft are joining forces, it will grow to be?still number two," Mr. Howe said. "When Google controls almost two-thirds of the market, there isn't a lot of room to grow without taking share from it, and this deal does little to change that.

In addition, ad rates are still headed south, according to Yankee Group.

"Despite the allure of search advertising, the facts are that Internet advertising inventory is still growing dramatically faster than advertiser budgets," Mr. Howe said. "This deal does nothing to reduce that inventory glut or the falling ad rates that result from it."

Regulatory hassles will benefit Google, not Microsoft or Yahoo, according to Yankee Group.

"Because this deal is being subjected to regulatory approval, it will make advertisers hesitate to commit their dollars to both Yahoo and Microsoft when they might have to modify their deal to satisfy regulators," Mr. Howe said. "The result: ad dollars will flee to the safety of Google's search marketplace rather than take a chance."

Another analyst believes this deal represents an attempt from Yahoo and Microsoft to focus on their strengths and try to find synergy between each other in order to stand out in a market that is dominated by Google.

"As Yahoo and Microsoft pointed out, search is all about scale," said Jia Wu, analyst for Strategy Analytics, Boston. "This deal formed a search advertising alternative whose scale is closer to that of Google.

"It indicates that Yahoo is moving towards a media company direction, which is more content-oriented rather than technology-focused," she said. "Yahoo will offload many of its engineers and focus more on selling its ads on the online properties.

"Now Yahoo's competitive advantage is its huge online audience, which is also what it brings to Microsoft, and we believe how Yahoo can grow in the future is to create valuable and interesting content, as it may be hard to see technological innovation from Yahoo in the future."

For Microsoft, it gains more online audience for its new search engine Bing. From the user scales it gets from Yahoo, Bing can get more insights about how users use search and keep improving the Bing products.

"We believe there is very little positive financial impact on Microsoft in the short term, and it is more of a long-term strategic step for Microsoft to compete with Google that now aims to challenge Microsoft's core business," Ms. Wu said. "If Microsoft can take search shares from Google, which means lower revenue for Google, it will limit Google's ability to enter the operating system business.

"It still remains unclear if the deal could steal some market share for the two companies from Google," she said. "In terms of mobile search, we believe this market is still at its infant phase and this deal makes the market more subject to changes of competitive landscape.

"With the Yahoo partnership, Microsoft will increase its mobile search presence significantly, while Google is still dominating the market."

As many operators in the U.S. partner with Yahoo, which will use Bing in the future, Google will face more challenges on the mobile side than on the online market, according to Strategy Analytics.

"But from the revenue point of view, it takes time for the mobile search market to grow and we will have to wait to see what these players will do in the next couple of years to change the competition," Ms. Wu said.

This deal is an attack from Microsoft to defend its core businesses, as Google is targeting its future growth from the software market.

Analysts are still not convinced that Microsoft can completely turn around in the search business, but it may set more challenges on Google and lower Google's pace of growth in the future.

Strategy Analytics believes that this deal can be seen as Microsoft's reaction to Google's announcement of its Chrome OS.

Due to search ads' CPC model, the deal is unlikely to see a huge leap of the search revenues from the two companies, according to Strategy Analytics.

"It is possible that more brands are willing to come and place ads on Yahoo-Microsoft, but their spending on these sites won't be much more than before," Ms. Wu said.

Terms of the agreement
Microsoft will acquire an exclusive 10-year license to Yahoo's core search technologies, and Microsoft will have the ability to integrate Yahoo search technologies into its existing Web search platforms.

Microsoft's Bing will be the exclusive algorithmic search and paid search platform for Yahoo sites. Yahoo will continue to use its technology and data in other areas of its business such as enhancing display advertising technology.

Yahoo will become the exclusive worldwide relationship sales force for both companies' premium search advertisers.

Self-serve advertising for both companies will be fulfilled by Microsoft's AdCenter platform, and prices for all search ads will continue to be set by AdCenter's automated auction process.

Each company will maintain its own separate display advertising business and sales force.

Yahoo will develop and "own" the user experience on Yahoo properties, including the user experience for search, even though it will be powered by Microsoft technology.

Microsoft will compensate Yahoo through a revenue-sharing agreement on traffic generated on Yahoo's network of both owned-and-operated and affiliate sites.

Microsoft will pay traffic acquisition costs to Yahoo at an initial rate of 88 percent of search revenue generated on Yahoo's owned-and-operated sites during the first five years of the agreement. Yahoo will continue to syndicate its existing search affiliate partnerships.

Microsoft will guarantee Yahoo's owned-and-operated revenue per search in each country for the first 18 months following initial implementation in that country.

At full implementation, expected to occur within two years following regulatory approval, Yahoo estimates that this agreement will provide a benefit to annual GAAP operating income of approximately $500 million and capital expenditure savings of approximately $200 million.

Yahoo also estimates that this agreement will provide a benefit to annual operating cash flow of approximately $275 million.

The agreement protects consumer privacy by limiting the data shared between the companies to the minimum necessary to operate and improve the combined search platform, and restricts the use of search data shared between the companies.

The agreement does not cover each company's Web properties and products, email, instant messaging, display advertising or any other aspect of the companies' businesses. In those areas, the companies will continue to compete.

The transaction will be subject to regulatory review. Microsoft and Yahoo expect the agreement to be closely reviewed by the industry and government regulators.

Google has 78 percent of the global market share for paid search, so Mr. Ballmer speculated that Washington would not block the deal.

The companies are hopeful that closing can occur in early 2010.

The companies have established a Web site at http://www.choicevalueinnovation.com to provide consumers, advertisers and publishers with additional information about the agreement.